Panic selling accelerates in currency markets

Currencies and equities traded sharply lower on Wednesday as the Dow Jones Industrial Average tumbled more than 900 points. At the start of the week, analysts had warned that panic selling can lead to multi-day declines in the market especially after strong gains in stocks. When one combines that with major events, “de-risking” can cause sharp and aggressive sell-offs in currencies and stocks. Another US stimulus package is dead.

The Senate pushed through Judge Barrett’s confirmation and adjourned for recess until 9th November, almost a week after the election. The odds of a stimulus deal before the election was slim to begin with but the resilience in stocks over the past few weeks was a sign that investors held out hope.

Unfortunately now that reality has set in, the smartest move is to cut positions and reduce exposure. There’s no question that more stimulus is in the pipeline for Americans but next week’s US Presidential election and the fresh lockdowns across Europe are major distractions.

On Thursday, USD will take its cue from US third quarter GDP and risk appetite. A sharp snapback in growth is expected for Q3 after the steep contraction in the second quarter. The only question is how much of an improvement there will be and whether it matters to investors.

Unlike other countries that face a dark winter the US government has largely ignored the record breaking new virus cases. A few states have taken matters into their own hands but unless more states impose wider restrictions, investors see the recovery in Q3 extending into Q4. If GDP growth beats expectations, greenback will extend its gains against other currencies.

Meanwhile the pressure is on the European Central Bank to act.  They are widely expected to leave monetary policy unchanged on Thursday but there’s a small chance that they could surprise with new policy action.  Europe’s COVID-19 outbreak has gotten out of control. At first, governments were reluctant to return to full lockdowns but they are quickly realizing that there’s no other choice.

There’s no doubt that the Eurozone economy is destined for contraction in the fourth quarter. Economists expect the ECB to lower economic projections and central bank President Lagarde to set the stage for December easing. However between negative price pressures and the very real possibility of a double dip recession, the ECB could decide that acting early is the right move. The ECB won’t have anything positive and opt for easing at a time when the Federal Reserve is comfortable with its steady stance.

Bank of Canada left monetary policy unchanged. Although they now expect a smaller contraction in 2020, they lowered next year’s growth outlook and pledged to continue buying bonds. They said Canada’s economy is transitioning to a more moderate recuperation phase but saw growth in the US and Europe slowing considerably.

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